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Tuesday, April 22, 2008

Fragile Banks: More Bailouts, More Capital

This is the SECOND German bank to run into trouble this month:

Duesseldorfer Hypo Rescued by Bank Group After Crisis (Update2): “Duesseldorfer Hypothekenbank AG, the closely held German public-sector lender, was bailed out by a group of banks, at least the fifth lender in the country to get emergency aid since the collapse of the U.S. subprime market.”

I must emphasis the fact that it is the FIFTH bank in Germany to get emergency aid.

“The BdB banking association bought Duesseldorfer Hypo from the Schuppli family and aims to sell it to a new owner, it said in an e-mailed statement late yesterday. The bank, which has a balance sheet of 26.7 billion euros ($42.4 billion), has booked 8.5 million euros in writedowns on asset-backed securities since last year. It doesn't own subprime loans, it said.”

So, despite NOT directly owning any subprime loans, this bank quickly and quietly imploded.

“Writedowns and lower demand for public-sector financing almost erased profit at Duesseldorfer Hypo last year, after earnings of 22 million euros in 2006.”

With worse still to come as consumer credit and commercial real estate are all expected to start to suffer now, that was enough to kill this bank.

RBS to Sell $24 Billion in Shares After Markdowns (Update4): “Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors in Europe's largest rights offer to boost capital depleted by writedowns.

RBS fell as much as 5.7 percent in London trading after saying it marked down assets by 5.9 billion pounds and will cut the 2008 dividend.”

RBS got a little greedy and stretched itself a little too thin just a couple of months ago with the acquisition of ABN Amro Holding NV.

“RBS's capital cushion shrank after credit markdowns and its part in last year's 72 billion-euro ($114 billion) purchase, mostly in cash, of ABN Amro Holding NV with partners Banco Santander SA and Fortis.”

The acquisition battle was a long one with many different players furiously outbidding and out maneuvering each other for the privilege of being the GREATEST FOOL.

I shit you not, but now the SAME dumbass analysts that called for more and more acquisitions are calling for divestitures. Hilarious.

“They have overpaid for acquisitions and have had a weak capital base, but there's nothing in this statement which confesses that they have made significant mistakes over recent years. We would like to see disposals from the global banking and markets portfolio which got them into trouble.” -Simon Maughan, Analyst at MF Global Securities Ltd. in London

“The bank plans to issue 11 new shares for every 18 existing shares at 200 pence each, or 46 percent below yesterday's close.”

That is expensive. Existing shareholders just got seriously diluted… and still it may not be enough:

“Moody's Investors Service said today that it may downgrade the B+ financial strength rating and the Aaa senior debt and deposit ratings of Royal Bank of Scotland Plc and the Aa1 senior debt rating of the group.”

National City Follows Wachovia, WaMu in Rush for Cash (Update1): “National City Corp. joined Wachovia Corp. and Washington Mutual Inc. to tap what KBW Inc. calls “an abundance” of capital, after losses tied to the slumping housing market made U.S. financial companies a bargain for investors.

National City, Ohio's biggest bank and subprime lender, agreed to sell a $7 billion stake to a group led by Corsair Capital LLC yesterday, at a discount to market price. The move, which would dilute existing shareholder value, sent the stock plummeting almost 28 percent.”

The discount was 40% to the previous close. That would certainly warrant at least a 28% drop.

Bottom pickers in financials are going to get whacked. Wait for all the capital raising to have been concluded. You won’t miss out. Prices will languish for years as the banks work through their balance sheets and retrench.

Prices are at resistance just below the psychologically important 1400 level on the S&P 500 (SPX). Resistance ranges from about 1390 to 1396 and appears to be pretty solid. The low volume rally that got prices this far should run out of steam here. The bounce from 1257 has been impressive. Oversold conditions have been alleviated. Complacency has set in (VIX, grey). It is time for the next leg down. The financials started declining yesterday, even as the broader markets held their ground.

The Mortgage Finance Index (MFX) couldn't even make it past the recent swing high of 52.73 on this bounce. More importantly, notice how MFX turned south first, while the S&P 500 (SPX, grey) continued to squeeze higher to about 1390. The broader markets CANNOT sustain a rally of any kind as long as the financial complex continues to a source of weakness. The REAL bottom will be confirmed when the broader financial complex LEADS the rally out the hole. I don't expect the lows around $40 to hold...

As the banks desperately go raising capital, the dilution effects alone will result in declining equity prices. Expect a test of the lows around the $75.00 area on the Bank Index (BKX) in the very near future. Failure of these lows is probable.

Related Posts:
Credit Losses and the Shape of the Recession
Watch the East Buy the West for Cents on the Dollar
Sarcastic Rant on Fannie and Freddie


Darrell's End Times said...

My advice to you is not to plan on retiring to a foreign country and expect to live a comfortable life on dollar dominated income. During the cold war the dollar was granted reserve currency status by many central bankers.

This means that one could take their dollars any where in the world and buy goods, services and assets. This was a good thing for America, we did not have to obtain the other country’s currency in order to obtain the things we needed but simply give them our dollars.

Times have changed: we are no longer in a cold war but in a globalize economy in competition with other countries to sell goods and services. Because the dollar is a reserve currency, American companies have a competitive advantage over companies based in other countries. Foreign companies have to obtain the dollar in order to get the goods, services, and/or assets they need in order to continue their business.

The world is flooded with dollars, way more than is needed in order to conduct business. This came about because we our Federal Reserve issued dollar to fund wars, budget deficits, government programs, etc. This funding comes about in the form of debt financing, which is largely financed by foreign holders of the dollar.

Without going into details on how all these processes work to create currency, be aware that the dollar is in oversupply, our Federal Reserve continues to issue more dollars and central bankers have no choice but to continue to accept the dollar as legal tender in their country.

It is apparent to foreign investors, foreign merchants and other foreign users of the dollar that our currency is quickly losing their value. It is a matter of when our dollar will no longer be accepted as legal tender in foreign countries.

What will our economy look like when we can no longer use our dollar to obtain the goods, services, and assets we need? Your guess is as good as mine. I tell people to save pennies in glass jars and practice frugality, as you will have to learn how to do without.

Read the bible, pray and know that God will make all things work for good to those who love him.

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